Big Options Play Counting on Global TeleSystems Bounce

An investor made a sizable bet on the fate of Global TeleSystems (GTS Quote) Tuesday, hoping the rough times for the company's stock are over.

Volatility Index Close % Change 22.87 -2.43 Source: ILX

Someone sold 5,000 October 7 1/2 out-of-the-money puts at 1 1/4 ($125), up 3/16 ($18.75), on the American Stock Exchange. Open interest, the number of contracts opened on that option, totaled 99 as of Monday's close. Global TeleSystems stock was up 3/8, or 4.4%, to 8 7/8.

Put/Call Ratio Today¿s Close Previous Close 0.52 0.43 Source: ILX

While put buyers are typically seen as bears, put sellers take in a premium against the risk of the stock's falling and having to purchase shares at the strike price (7 1/2, in this case) to fulfill the contract. That makes the basic strategy of a put sale bullish, because the seller profits from the stock's rising or not moving because the options expire worthless.

By selling the puts, the investor is speculating that Global TeleSystems isn't going to fall below 7 1/2 and the option will expire worthless and thus the seller can keep the premium collected for selling the contract. Or, worst-case scenario, even if Global TeleSystems stock falls and the put expires in the money, the put seller's options are assigned and he buys the stock at 7 1/2.

Shares of Global TeleSystems, a European broadband services provider, have had a rough year. As of Monday's close at 8 1/2, the stock was down 76%, year-to-date and the 52-week intraday low is 7 11/16.

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The Securities and Exchange Commission recently sent a letter to some options market-making and specialist firms asking for details on their payment-for-order-flow arrangements, the term of art for paying brokerages to place orders with them. A lot of details.

The SEC letter asks trading firms to provide a list of brokerages it pays for order flow, a list of the options for which the broker is paid and the dates the trading firms finalized their customer options-order-flow arrangements. It also requests copies of the deals.

The SEC is also asking trading firms to provide the names of brokers that the traders have sent letters regarding payment for customer options orders and copies of all the letters and responses.

The SEC announced last month that it will conduct a study on the development of payment for order flow in the options market and any changes in market quality since the multiple listing of options.

Paying to get business has become a hot-button issue in the market community, with critics contending that payment for order flow can affect the execution of trades at the best price.

Brokerages must tell customers when they open a new account and annually in writing whether they receive payment for order flow; if they do they must describe the type of the payments. Brokerages must also disclose on trade confirmations whether they receive payment for order flow. In addition, customers can make a written request to find out the source and the type of payment on a particular transaction.